You are default alive if, with expenses staying where they are and revenue growing at the rate it has for the last few months, the company becomes profitable before the money runs out. If the cash runs out first, you are default dead. The test comes from a 2015 essay by Paul Graham. Below is the exact calculation, a spreadsheet you can copy, and one company that comes out alive or dead depending on a single input.
What Paul Graham asked
In Default Alive or Default Dead?, Graham describes the first thing he wants to know when he talks to a startup that has been operating for more than eight or nine months. Assume expenses stay constant and revenue keeps growing at its recent rate: does the company reach profitability on the money it has left? He wrote that about half the founders he talked to could not answer.
The test makes two assumptions on purpose. Expenses are frozen, so no new hires are included and no cuts are assumed. Growth continues at the rate you have actually achieved, not the rate in the plan. Future fundraising is left out completely. The essay says that if a company is only alive because investors will save it, the founders should say exactly that out loud.
The essay links to a calculator by Trevor Blackwell that plots the same thing with a revenue growth rate. At the time of writing its security certificate had expired, so this page shows the math directly.
The four inputs
You need four numbers, all monthly and all cash:
- Cash in the bank today.
- Monthly expenses: everything that leaves, including costs you have already committed to, such as a hire who has signed.
- Monthly revenue today. For a subscription business this is your MRR, counting annual plans at one twelfth.
- Your monthly growth rate, averaged over the last three months.
The growth rate is the input people get wrong. Work it out as a compound rate from two revenue figures three months apart:
monthly growth = (revenue now / revenue 3 months ago) ^ (1/3) - 1 example: (25,000 / 20,000) ^ (1/3) - 1 = 0.0772, so 7.7% a month
A rate matches the essay, which talks about revenue growth continuing at its recent pace, and it matches Blackwell's calculator. If your revenue actually grows by a similar amount each month, rather than a similar percentage, run it that way as well. Linear growth is the more cautious assumption.
The calculation
Project forward one month at a time. Revenue grows by the rate, expenses stay flat, and whatever revenue does not cover comes out of cash.
revenue(month) = revenue(previous month) x (1 + growth) cash(month) = cash(previous month) + revenue(month) - expenses alive: revenue reaches expenses before cash drops below zero dead: cash drops below zero first
To build it in Google Sheets or Excel, put the growth rate in F1 and monthly expenses in F2, then:
A2: 0 B2: current revenue C2: current cash A3: =A2+1 B3: =B2*(1+$F$1) C3: =C2+B3-$F$2 fill row 3 down about 36 rows verdict: the first row where B >= $F$2 (alive) or C < 0 (dead)
If you only want to know when the company turns profitable, there is a shortcut. It does not tell you whether the cash lasts that long, so you still need the table:
months to profitability = ln(expenses / revenue) / ln(1 + growth) example: ln(60,000 / 25,000) / ln(1.0772) = 11.8 months
Worked example: default alive
A software company has €400,000 in the bank, spends €60,000 a month and has €25,000 of monthly revenue. Three months ago revenue was €20,000, so it is growing about 7.7% a month.
| Month | Revenue | Loss this month | Cash at month end |
|---|---|---|---|
| 1 | €26,930 | €33,070 | €366,930 |
| 3 | €31,250 | €28,750 | €307,190 |
| 6 | €39,063 | €20,937 | €236,178 |
| 9 | €48,828 | €11,172 | €192,413 |
| 11 | €56,660 | €3,340 | €181,672 |
| 12 | €61,035 | profit €1,035 | €182,707 |
Revenue passes expenses in month 12 with about €183,000 still in the bank. The company is default alive, even though it lost €33,000 in its first month and plain runway (cash divided by today's burn) says 11.4 months.
Same company, slower growth: default dead
Change one input. Suppose revenue three months ago was €22,500 instead of €20,000. Revenue today is still €25,000, but the growth rate is 3.6% a month.
| Month | Revenue | Cash at month end |
|---|---|---|
| 1 | €25,894 | €365,894 |
| 4 | €28,771 | €269,261 |
| 8 | €33,110 | €155,002 |
| 12 | €38,104 | €59,708 |
| 15 | €42,338 | €2,388 |
| 16 | €43,851 | -€13,761 |
Cash runs out in month 16, when revenue is still about €16,000 a month short of expenses. The team, the product and the bank balance have not changed, and the verdict has. For this company the line sits at about 4.3% monthly growth. Above it, default alive. Below it, default dead.
Use it to test decisions
The verdict is useful on its own, but the calculation earns its keep when you rerun it before a decision.
Take the alive company and add a hire at €9,000 a month from today. It stays alive, reaches profitability in month 14 and has about €73,000 left. Add two hires costing €15,000 a month together and it becomes default dead: cash runs out in month 13. The question "can we afford this hire?" gets a precise answer: one yes, two no, at the current growth rate.
Now take the dead company. Cutting €3,500 a month from expenses gets it to profitability in month 24 with about €2,000 left, which is too thin to count on. Cutting €8,000 a month, to €52,000, makes it default alive: profitable in month 21 with about €98,000 in the bank. Raising growth from 3.6% to 4.3% does the same job, if you know how you would do that.
Graham's essay is blunt about which decision matters most: "Hiring too fast is by far the biggest killer of startups that raise money." The hire test above is the arithmetic version of that sentence.
Mistakes that flip the answer
Taking the growth rate from your best month. One strong month can double the rate you plug in. Use three months, and if the last quarter included a one-off deal, take it out.
Leaving out expenses you have already committed to. The essay freezes expenses at their current level, but a signed hire or a new office lease is already part of that level. Put commitments in, leave hopes out.
Counting the next round. Money you expect to raise does not go in the cash cell. If the only way the company survives is a raise, the answer is default dead, and the plan is a fundraise with a deadline.
Using bookings instead of cash. A signed contract that pays in 60 days is not revenue in this month's row. Annual prepayments count at one twelfth a month, as they do in net burn.
Asking too early. Before real revenue there is no growth rate to project, and the question does not mean much. Graham suggests starting to ask too early rather than too late, because the danger is realising you are default dead when there is no longer time to fix it.
If you are default dead
You have three moves, and they can be combined. Grow faster, but only count growth you can explain, such as a price change or a channel that is already working. Raising prices is often the quickest lever. Spend less: find the expense level at which your current growth reaches profitability in time, then decide whether the company still works at that size (cutting costs without cutting muscle covers how to choose). Or raise, with a date: work out your run-out month, subtract the time a round takes, and decide in advance what you will cut if the round has not closed by then.
In The Fatal Pinch, Graham describes where default dead companies end up when they wait: high burn, mediocre growth, and investors who are less interested the more the company needs them.
If you are default alive
Rerun the projection before every hire and every big commitment. Two hires turned the example company dead. Being default alive also means a raise is optional, and you can decide how much runway a round should buy on your own schedule.
Where Plainhub fits
Plainhub's runway figure is cash divided by net burn at today's revenue, with no growth assumed. For a growing company that is the cautious number: if Plainhub shows 11 months and your growth is real, the default alive projection will come out longer. The growth projection itself is a spreadsheet job, and the table above is all it takes. What Plainhub does add is the decision test: put a hire on the Plans page as a draft and you see runway and the cash-out date with and without it before you commit.